The importance of making exclusion clauses clear!

The recent Court of Appeal case of Soteria Insurance Ltd v IBM United Kingdom Ltd [2022] on loss of profit and wasted expenditure is interesting as it provides useful guidance on the drafting and interpretation of exclusion clauses.

This case concerned the non-delivery of an IT system, which led to non-payment of an invoice by the customer, which led to the termination of contract by the supplier.  The customer started proceedings stating the supplier had wrongfully repudiated the contract and claimed damages for wasted expenditure.

The initial judgement held that the contract had been wrongfully repudiated but the claim for wasted expenditure was excluded due to a clause in the contract which excluded claims by either party for “loss of profit, revenue, savings (including anticipated savings) (in all cases whether direct or indirect).”.  The case then went to appeal based on the construction of the clause.

The Court of Appeal concluded unanimously that:

• “Wasted expenditure” had not been specifically referenced yet other aspects had been and therefore on the natural and ordinary meaning of words a claim for wasted expenditure was not excluded;
• When considering the principles relating to construction of clauses and applying them there was nothing to suggest that costs incurred by the customer in expectation that the contract would be fulfilled could not be recovered if there was a repudiatory breach by the supplier;
• Consequential losses that are speculative to qualify such as loss of profit, revenue or savings are distinctly different to the wasted expense that can be qualified by evidence such as invoices and receipts after payment has been made because of the expectation a contract would be performed; and
• Loss of bargain can be calculated in different ways: wasted expenditure is one way and loss of profits another.

So what does this mean?

Use clear language! Exclusion clauses will be interpreted by:

• Giving the words their normal meaning;
• Looking at how a reasonable person would interpret the clause having full possession of the facts; and
• Be reviewed in terms of what the consequence is of excluding the liability.